Friday, September 26, 2014
A recent Tax Court case, Salzer v. Comr., T.C. Memo 2014-188, provides another disadvantage faced by tax protesters. In Salzer, after the IRS computed the tax protester’s tax liability using married filing separately rates, the protestor argued that the joint return rates should be used because, had he filed a return, he would have filed a joint return. The Court correctly noted that the outcome must be based on what the taxpayer did, not what the taxpayer would have done had he not failed to file returns in the first place.
The letter sent by the tax protester to the IRS to explain why he did not file returns contains the usual tax protester boilerplate, which propagates the way the flu virus spreads during an epidemic. It’s bad enough there are people who generate this nonsense, but it’s far worse and rather sad that there are many more people who think it’s good advice, get duped, and end up worse off than they would have been. The worst part is that there is no practical way for the duped protesters to track down the source of the bad advice and sue for the damages incurred by their misdeeds.
Wednesday, September 24, 2014
Now comes a Philadelphia Inquirer story, reporting that Senator Cory Booker has introduced legislation to repeal the tax exemption for professional sports leagues and to use the revenue to fund programs designed to reduce domestic violence. Though I agree with the first part of the proposal, the second presents a bad precedent.
Why should revenue raised from certain professional sports leagues, namely, those currently exempt, but not from other leagues that currently pay taxes, be devoted to a particular cause? If one suggests that some professional athletes are responsible for domestic violence incidents, are the ones who act that way confined to the currently exempt leagues? And what of Hollywood celebrities, rock stars, attorneys, architects, plumbers, sales personnel, police officers, clergy, insurance agents, landscapers, automobile dealers, pilots, nurses, mechanics, computer programmers, and others who engage in domestic violence. Why would the taxes paid by their professional associations or fraternal organizations not be devoted to ameliorating domestic violence? As a further demonstration of why Booker’s idea is illogical, what about the other crimes committed by professional athletes playing for teams in the currently exempt leagues? Some of them, far from most of them, have been known not only to engage in domestic violence but drunken driving, handgun offenses, and murder.
The idea of associating a particular group of people with a particular social infraction is what leads to prejudice and stereotyping. The idea of singling out one particular offense as though the others did not matter as much, or focusing on a select group of individuals as though people who are not professional athletes in those leagues do not engage in domestic violence is outright silly. It’s simplistic, it is designed to get attention rather than dig at the root of the problem, makes for politically useful sound bites, but does not present any sort of long-term solution.
Repeal of an indefensible tax exemption is a matter of tax law. Dealing with domestic violence is a matter of criminal law. The idea of tax law once again riding to the rescue of another area of law that doesn’t work well simply perpetuates the same thinking that has the IRS handling the work that other federal agencies ought to be doing. All the tax revenue in the world isn’t going to cut down domestic violence if the offenders are allowed to walk away with few or no consequences. Perhaps instead of spending most of their time complaining about taxes and the IRS, these critics can start focusing on the criminal justice system, and the underlying educational deficiencies that fertilize this bad behavior.
Monday, September 22, 2014
But tax complexity can also refer to the confusing array of taxes that affect institutions and individuals. There are income taxes, sales taxes, transfer taxes, gift taxes, excise taxes, to name but a few. These taxes can exist at the federal level, state level, county level, and local level.
So when someone engages in a transaction and is told there is a tax, the likelihood of the person being familiar with the tax depends on the tax and the person’s experience. When the amount in question is huge or when the person has professional advisors, the tax can be researched and taken into account. But what happens when someone is told that a tax exists, and pays that tax, only to discover that the tax does not exist?
Several days ago, the Attorney General of New York announced that Walmart has agreed to pay penalties and costs for charging $3.50 for Coca-Cola products advertised for $3.00. In some instances, Walmart employees told customers that the national advertising did not apply in New York, a violation of New York law. In other instances, Walmart employees told customers that the 50 cent increase was on account of a New York sugar tax, a tax that does not exist.
The investigation determined that Walmart cash registers were programmed to charge the higher price. Walmart did not fix the problem when customers complained, but did so after the Attorney General stepped in. The overcharge was imposed on roughly 66,000 sales of the Coca-Cola product in question.
The settlement between Walmart and the Attorney General requires Walmart to pay $66,000 in penalties and other costs. I doubt that this money will find its way back to the people who were overcharged. For Walmart, $66,000 is like a middle-class individual losing a penny. Why not impose a penalty of an amount sufficient to send the message that needs to be sent, and then distribute that amount, net of costs, to low-income individuals in New York?
This series of incidents demonstrates not only why it is risky to have so many different jurisdictions imposing so many taxes that a multi-billionaire company tries to sneak in a fake tax, but also why government regulation of the so-called free market is a necessity so long as this sort of behavior, intentional or otherwise, persists.
Friday, September 19, 2014
Perhaps it’s not the worst deliberately misleading comment, if in fact it is a deliberately misleading comment. But when a person makes a deliberately misleading comment about something that isn’t complicated, one’s faith in that person’s ability to tell the truth is undermined.
Yes, I’m talking about that horrific phrase, “IRS Code.” More than six years ago, in Is Tax Ignorance Contagious?, I wrote:
Now the governor of Pennsylvania has jumped on the tax misunderstanding bandwagon. A few days ago, as reported in Hidden Costs Will Make Turnpike Deal a Bad One, Ellen Dannin and Phineas Baxandall explain that Governor Ed Rendell, in pushing for his turnpike leasing plan, "called for using a 'tax-exempt, public benefit corporation under IRS code 63-20.'"Less than a year ago, in Intentional Misleading Tax References, I returned to this problem, explaining:
Simply put, there is no such thing as "IRS code 63-20." First, there is no such thing as an IRS code. There is an Internal Revenue Service. There is an Internal Revenue Code. The IRS does not create nor does it own the Internal Revenue Code.
Last week, a tax colleague at another law school pointed out the use of the term “IRS Code” in a Wall Street Journal story. This misleading reference, though common, surely cannot be accidental every time it occurs. On at least two previous occasions in Is Tax Ignorance Contagious? and Code-Size Ignorance Knows No Boundaries, I have criticized the use of the term “IRS Code” by people from whom I expected better.Several days ago, in a report titled IRS regulations prevent sleeping pods at Anchorage airport, the phrase “Internal Revenue Service codes” or “IRS code” was used six times. This, despite the headline referring to IRS regulations, a phrase that is technically incorrect because the regulations are issued by the Treasury Department. Yet the article cites, not a regulation, but the Internal Revenue Code, specifically, “section 142.C.2.a” (a rather novel way to cite an Internal Revenue Code provision).
Though sometimes the use of IRS Code is accidental, and in most of those instances probably a matter of someone uneducated in tax picking up the term from someone else, in too many instances the use of the term “IRS Code” is intentional. Why would someone intentionally make an error? The answer is simple. Someone who intentionally uses this term, knowing full well that the proper term is “Internal Revenue Code,” does so in order to sucker people into thinking that the IRS is responsible for what is in the Internal Revenue Code. Who benefits from shifting public unhappiness with the tax law to the IRS? Why, the people who are responsible for the Internal Revenue Code, specifically, members of Congress, their staffs, and the lobbyists who have procured much of what pollutes the tax law.
The impact of this erroneous use of an invented phrase is to cause people to think that it is the IRS that is responsible for the problems with sleeping pods at the Anchorage airport. That removes the spotlight from the Congress, which is responsible for the enactment of the restrictions in section 142(c)(2)(A). If the cause is ignorance, the question matrix begins with asking whether the person writing the article is sufficiently familiar with taxation. If so, the question is why such an error would be made. If not, the question is why the person did not consult with someone who is sufficiently familiar with taxation. If the cause is deliberate misstatement, the simple question, for which the answer is easy, is why is this being done.
Even if the error is simple ignorance, the ramifications are serious. As instance upon instance of using this erroneous and misleading phrase pile upon one another, it becomes easier for those whose goal is to mislead people into shifting blame for the nation’s tax mess from the Congress to the IRS. This is particularly serious to the extent these folks are trying to eliminate the IRS, tax revenue, and the federal government in order to permit states to engage in the egregious behavior that only the federal government has been able to curtail.
In Intentional Misleading Tax References, I noted:
Unfortunately, the term “IRS Code” is going viral. More than 350,000 hits appeared when I put the term into a google search. The faster this nonsense spreads, the more difficult it becomes to eradicate its use. Unlike some errors, which are annoying but not particularly harmful, this error causes great harm and is particularly nefarious because it is the product of deliberate attempts to manipulate people. Until Americans get themselves educated about what matters, they will continue to be played and continue to complain about afflictions within their ability to eliminate. It is time to speak up and object whenever someone uses the misleading “IRS Code” term.Today, eight months later, the number of google hits when searching for “IRS code” has grown by 14 percent. As I promised, I will continue to hammer away at this not-so-subtle intentional and unintentional attempt to shift the focus away from a failed Congress that has increasingly betrayed its fiduciary duties.
Wednesday, September 17, 2014
I’m talking about the “size of the Internal Revenue Code” nonsense about which I’ve commented many times. I first visited the issue in Bush Pages Through the Tax Code?, and revisited many times, starting with Anyone Want to Count the Words in the Internal Revenue Code?, Tax Commercial’s False Facts Perpetuates Falsehood, How Tax Falsehoods Get Fertilized, How Difficult Is It to Count Tax Words, A Slight Improvement in the Code Length Articulation Problem, and Tax Ignorance Gone Viral, Weighing the Size of the Internal Revenue Code, Reader Weighs In on Weighing the Code, Code-Size Ignorance Knows No Boundaries, and continuing through Code-Sized Ignorance Discussion Also Is Growing.
The problem is that someone deliberately or negligently proclaimed that the Internal Revenue Code consists of 70,000 pages. Other outrageous size claims also circulate, but the 70,000 assertion is the easiest to dissect. The 70,000-page figure is the number of pages in the CCH Standard Federal Tax Reporter. It includes not only the text of the Internal Revenue code, but also the text of Treasury Regulations, the text of some cases and rulings, commentaries, charts, indices, annotations, and all other sorts of things. NONE of these items are part of the Internal Revenue Code.
Now comes yet another repetition of this misrepresentation. Serving up The Cost of Tax Compliance, Joshua D. McCaherty graces us with a chart carrying the label, “Tax Complexity Keeps Piling Up.” The y-axis carries the label, “Pages in the CCH Standard Federal Tax Reporter.” The pattern along the x-axis, mapped against the y-axis, carries the label, “Length of Tax Code.” Put simply, McCaherty equates the length of the tax code with the number of pages in the CCH Standard Federal Tax Reporter. That is simply wrong. Wrong.
Curious, I followed the link on the page to McCaherty’s biograpy. He is a “policy intern” for the Tax Foundation. He holds a bachelor’s degree in Business Administration and Economics from Liberty University, and is an MBA student at the same institutions. “He has been active running political campaigns, owning his own company, participating in student government, and as a member of College Republicans. Josh is particularly interested in how taxes effect sustainable business growth. After graduation, Josh is considering a career in public policy or the non-profit sector.”
Perhaps it is not his fault that he doesn’t understand the difference between the Internal Revenue Code and Treasury Regulations. Perhaps it’s not his fault that he does not understand that annotations and commentaries are not part of the tax law, let alone the Internal Revenue Code. Perhaps his instructors do not understand these things and thus were unable to explain reality to their students. Perhaps his instructors talk about tax but don’t understand enough about it. Or perhaps his instructors deliberately fueled this disinformation campaign, as part of the “if we scare them with code length, we can abolish taxes” project.
It is particularly frightening to think that the next generation’s tax policy and economics experts are going to be populated, to a greater or lesser extent, by individuals who either do not know the difference between the Internal Revenue Code and things that are not part of the code, or who are willing participants in a disinformation campaign waged to further questionable purposes.
As I wrote in Code-Sized Ignorance Discussion Also Is Growing:
Would it not be so much better if the folks who have fueled the misinformation come forward, admit their mistakes, correct the record, and turn their energies into something more productive? They face one of the few times where admitting a mistake does not risk arrest, litigation, imprisonment, job loss, or eviction. To the contrary, the tax world will bestow respect on those who can put aside the ignorance.On the other hand, perpetuating the ignorance will bring not only disrespect but also lack of confidence and, ultimately, tax policy decisions no less unwise and no less dangerous.
Monday, September 15, 2014
Recently, two exchanges in response to Facebook posts, one mine and one by a friend, reminded me of how much more work needs to be done to unravel the consequences of educational failures in this country. Both, of course, involved taxes, one directly and one indirectly.
One post, by a friend, criticized opposition to adjusting the minimum wage to reflect inflation since the last time that wage was adjusted. One of that friend’s friends defended the existing minimum wage amount by claiming that people earning the minimum wage do not pay taxes. Unable to resist the opportunity to try to fix this person’s misunderstanding, I pointed out that a person earning minimum wage still paid social security tax, Medicare tax, income tax in some states and localities, earned income tax in some localities, and unemployment compensation tax in some states. The person’s response was that everyone earning minimum wage received an earned income tax credit that wiped out their tax liabilities. So, once again, I replied, explaining two aspects of taxation that this person did not comprehend. First, the earned income tax offsets federal income tax liability, and to the extent it generates a refundable credit, does not necessarily wipe out the other federal taxes and the state and local taxes faced by the person. Second, many people who work for minimum wage do not qualify for the earned income tax credit. And that was it. There was no response, no thanks for the explanation, no admission of error, no promise to retract the erroneous assertion and undo whatever damage it did.
The other post, by me, was a sharing of a friend’s post that pointed out the hypocrisy of voting for a combination of tax cuts and spending increases and yet complaining bitterly about deficits and deficit spending. I commented that when the amount of tax cuts plus the spending increases exceed whatever excess of revenues over expenditures that might have existed, deficits will be created. Someone commented that my views were naïve. Really? If revenues are $100 and spending is $95, cutting revenues by $25 and increasing spending by $30 will create a deficit. How is it naïve to point that out? I suppose it’s because I don’t believe in the nonsense that the $25 tax cut will generate so much additional economic activity that taxes will increase by at least $55 to prevent a deficit from coming into existence. If anyone is naïve, it’s the person who believes the Pied Piper promises of the tax cut takers.
This is not the first time that my commentary on these topics have generated responses of this sort. What is alarming is that, although the responses come from different people, they are almost word-for-word identical to each other. That suggests to me that these folks aren’t doing independent thinking, but are simply, like a weak law student, regurgitating information without dissecting it, and pondering it, and thus coming to understand its flaws. Almost cult-like, they take in the propaganda and toss it out as would a mindless robot. In some ways, I feel sorry for these people, because they are victims of one of the most perfidious misinformation campaigns yet waged in American history, if not that of the world. The people who generate the false talking points that lead, for example, to claims that the earned income tax credit wipes out all tax liabilities of all minimum wage workers, surely know that they are misleading people, if not lying to them, but they rest comfortably in their understandable supposition that enough people will buy into the nonsense without checking it out. Enough people to outvote the diminishing population of Americans who are able and willing to work through a thinking process to realize the sinister manipulations of the puppet masters. This, along with gerrymandering and big money vote purchasing, is how a small and dangerous minority oligarchy stands ready to totalitarianize the nation.
Friday, September 12, 2014
The developer asserts that the project will create 300 jobs and $100 million of economic activity to the local economy. Cannot similar "good for the public" arguments be made for every construction project of this sort? What’s to stop the legislature from dishing out millions to every development project in the state? Ought state legislatures be shelling out taxpayer dollars to these developers? Seriously?
The grant supposedly comes with a condition. Specifically, the funds cannot be used for construction of the residential units, but must be used for the parking garage and retail establishments. What difference does that make? The grant reduces the amount that the developer must pay for the garage and stores, which frees up more than $10 million that the developer ought to have spent on the garage and stores, to be used to offset the cost of building the apartments. Bookkeeping dancing aside, the bottom line is that the developer is getting money that most other business entrepreneurs don’t get. And some of them are doing something more useful than building even more stores in an area where retail space is abundant and some storefronts are empty because the economy isn’t strong enough to support full-capacity occupancy of what currently exists. That, of course, is because consumers have less money to spend, in part because of the shifting of wealth and in part because they’re paying taxes to fund these “grants” to developers who are far from bankrupt.
If the development cannot stand on its own financial feet without taxpayer dollars, then the development ought not take place. If the development of a parking garage has public value sufficient to attract taxpayer dollars, then the state should build and own the garage, collect the fees from operating, and recoup for the taxpayers not only their investment but a positive return that can offset future taxes. That’s how a democracy should work, rather than funneling tax revenue into the hands of a developer who is engaged in private enterprise.
There are more than a few people who question the wisdom of these “grants” to private individuals. If they don’t like this pattern of state government, then they ought to stop voting into office the people who are causing the state government to do this. The anti-tax crowd likes to complain about poverty-stricken “takers” but perhaps it is time to talk about the wealthy takers, and the elected officials who support them. If governments need to cut spending, let’s start with the tax breaks and the outright “grants” to the wealthy. Let’s not be misled by the smokescreen of the anti-tax crowd, a deception that is being used to shift, not reduce, government expenditures by changing the identities of those getting government assistance.
Wednesday, September 10, 2014
The standard explanation for these giveaways is that, without them, the business, and its presumed economic benefits for the state, would go elsewhere. Perhaps. A business should choose a location based on a variety of factors, including tax. But the tax factor ought to be the same for all businesses. It’s one thing to reduce business taxes generally. It’s a totally different thing to cut a tax break for one specific company, especially when, as in this case, the company is owned by an extremely wealthy individual. Why aren’t similar grants of largesse conferred on the small business operated by the struggling entrepreneur?
The answers are easy. The giveaway benefits people who contribute huge amounts to the financing of the political careers pursued by those who, in turn, present tax breaks and cash subsidies to the companies owned by their benefactors. When the smoke clears, the campaign donor ends up more than reimbursed, and the cost is shifted to the taxpayer. Every tax breaks costs the taxpayer, either in the form of higher taxes to make up the difference, a foregone tax reduction because the funds are no longer available, reductions in public spending because revenue is reduced and checks are diverted to the politician’s donor, or economically adverse consequences such as traffic congestion, environmental damage, and similar disadvantages.
In this particular case, the product manufactured by the favored company is beyond the purchasing power of most individuals, including those in the middle class. The public funding permits the company to reduce the price it charges its wealthy customers for its vehicles. This is yet another ploy by which the little wealth owned by the 99 percent is redirected in favor of the one percent. And yet there’s not a peep from the supporters of the one percent, including the dreamers who think they can join that group, who are so opposed to the notion of government transfer payments. Government transfer payments are detested by these people because they transfer funds to the poor, and yet these same people have no problem with the transfer of wealth from the poor to the rich. Is it that difficult to see what is happening, to identify those who are responsible for it, and to take steps to bring these schemes to an end?
Monday, September 08, 2014
According to Alexander’s sources, the NFL collected roughly $327 million in 2012. Those uninitiated in how the income tax functions, as demonstrated by some of the comments posted to the article, might think that tax rates ought to apply to that amount. However, the NFL turned around and spent some amount of money to pay its employees, pay rent on its offices, and to fund other business expenses. Those amounts should be deductible. In theory, the dues paid by NFL teams to the NFL ought to be enough to cover expenses, and the NFL should break even, or come within some de minimis amount of doing so. The Joint Committee on Taxation estimates that roughly $11 million of tax revenue is lost each year, which suggests that the NFL is collecting more in dues from its member teams than it is spending on its behalf. It seems to me that more information is needed to get a better picture of why and how this tax-exempt benefit was sought and is being used. An organization that collects dues from its members and spends those dues on behalf of those members, thus breaking even, doesn’t need tax-exempt status. If the NFL is making money, why should it be exempt from income taxation?
Friday, September 05, 2014
Colgan should know and understand that the Internal Revenue Code is a product of the Congress. The President cannot enact, declare, create, or amend the Internal Revenue Code. Yes, a President can make suggested changes, as every President, including the current one, has done. But Congress is free to accept, reject, or modify those rejections. In the case of the current President, the Congress has demonstrated no inclination to do much of anything with his or anyone else’s suggestions with respect to reforming the tax law. The Congress is too busy listening to the tax wish lists of the mega-millionaires and billionaires who fund their campaigns and tell them what to do.
Colgan lets us know that the Internal Revenue Code needs to be fixed and that doing so is a “monumental, yet critical, initiative.” He’s correct. He concludes, “[T]he CPA community stands ready to assist in this enormously important endeavor.” The CPA community can begin its assistance by joining in efforts to clean up and reform the Congress. That means putting an end to lobbying for the clients and, instead, advocating for the public common weal.
Wednesday, September 03, 2014
Zandi, on the other hand, tries to get at the root of the problem. He concludes that “the U.S. corporate tax code . . . is a mess.” He’s right. So, too, is the tax law for individuals, trusts, estates, partnerships, and tax-exempt organizations.
Zandi points out, “Some companies pay little tax because of loopholes in the code designed just for them.” Again, he is right. The issue isn’t the nominal tax rate, but the effective tax rate, and the problem is that corporations are not taxed at a uniform effective rate. Zandi notes that “[f]inancial institutions, energy companies, and some manufacturers” benefit from tax breaks. I’ll add that in some way those companies managed to “persuade” Congress to cut their taxes, not by playing with the rates, but by enacting narrowly applicable deduction and credit provisions of use only to those who hired the “lobbyists” who “persuaded” Congress to make the tax laws messier on behalf of those companies or industries.
It would be helpful to look at the list of companies going the inversion route, determine their effective tax rates, and then compare those rates with those incurred by corporations that are not inverting. There’s a research project in that proposal for some enterprising LL.M. (Taxation) or M.T. student who is about ready to ask for paper topic suggestions. My guess is that those corporations paying taxes at effective rates of fifteen, ten, and even zero percent have no reason to spend money doing an inversion.
The lesson here is simple. Let’s stop with the special treatment for a favored few. Though those favored with special tax breaks can throw together arguments why they are so much more important to the economy than anyone else, careful consideration and thought generates the conclusion that they’re no special than anyone else. If the citizens of this nation stand up to demand an end to the economic bullying that afflicts federal, state, and local tax systems, as well as the not-so-free free market, the nation will thrive in ways that presently are unattainable.
As Zandi points out, eliminating the special breaks permits a reduction of the corporate tax rate for all corporations. That sort of fairness might be objectionable to those presently doing well as a result of the economic bullying, but that sort of fairness is a core ingredient in what makes the American economy prosper. When fairness is compromised, everything else will collapse, sooner or later.
Monday, September 01, 2014
Last week, in Shankar v. Comr., 143 T.C. No. 5 (2014), the Tax Court held that the value of frequent flyer miles received by the taxpayer for opening a Citibank account was includable in gross income. The taxpayer’s testified that he knew nothing about the miles and did not receive an award from the bank. Thus, the court was left with the IRS determination of when the gross income occurred and the value of the tickets. The IRS produced evidence from the bank that the miles had been redeemed in 2009 for tickets worth $668, the price that otherwise would have been paid. This was the amount that the bank included on a Form 1099 sent to the taxpayer. The taxpayer did not include this amount on his return. The facts played out as I had predicted in in The Frequent Flyer Flap:
Citibank, which transfers frequent flyer miles to customers who open an account with the bank, issued Forms 1099 to its customers, reporting the value of the miles – that is another issue – as miscellaneous income. The practical effect is that failure by the customer to report the income will cause the IRS computers to make an adjustment because there is no entry on the customer’s income tax return matching the Form 1099.The court treated the miles received from the bank as interest, that is, an amount provided to the taxpayer for depositing money into an account available to the bank for its use. The court did not discuss why the valuation was based on the price of the tickets at the time of redemption rather than the value of the miles at the time of receipt. Nor did it discuss why the gross income occurred in the year of redemption rather than the year of receipt, though it is unclear from the opinion when the account was opened and the frequent flyer miles provided to the taxpayer, and if that transaction also occurred in 2009, it would not have been an issue worth discussing in this case. In a footnote, the court simply stated that the parties had not addressed, nor was it considering, whether award of the frequent flyer miles was the taxable event. The taxpayer appeared pro se, which explains in part why the issue was not presented.
The narrow holding of the case simply confirms a position the IRS expounded several years ago, namely, that frequent flyer miles received for opening a bank account were taxable. Other questions remain to be answered. For example, what if the taxpayer already had frequent flyer miles, and those received from the bank were added to the ones he already had, perhaps from making previous ticket purchases? How would it be determined if the taxpayer used the miles from the bank, the previously accumulated miles, or some combination, to purchase the $668 tickets? Would some sort of specific identification method be used, such as determining if the coupon or other document from the bank was transferred to the ticket agent? If so, who is responsible for keeping track of the transaction? In this case, the redemption apparently was processed somehow through Citibank, which issued the Form 1099. But apparently not all redemptions are processed in this manner.
The decision does not apply to all incentive rewards. As I explained in The Frequent Flyer Flap, the law is more complicated:
Does the IRS position mean that all items received as an incentive to doing business with a company includible in gross income? No. If the incentive is in the form of a rebate, it is not includible in gross income. Nor should there be gross income if the incentive is part of a package. For example, a buy-one-get-one-free promotion is nothing more than a reduction of the market price to half the stated price. Similarly, a buy-three-suits-get-a-free-tuxedo arrangement falls into the same category. On the other hand, if no purchase is involved, such as opening a bank account, there is no transaction to which a rebate can be connected. There is gross income. As the IRS spokesperson put it, whether something received for doing business is taxed as a prize or award "depends on the nature, value, and other facts and circumstances." That's a way of generalizing what I just explained in the preceding sentences. When the author of the story claims that the IRS explanation is "a fancy way of saying the IRS doesn't know," he is falling into the trap of wanting a definitive answer for a range of situations that cannot be bundled together for analytical purposes.For example, how should frequent flyer miles or similar incentives or points provided by credit card companies be treated? Clearly they do not represent interest paid to the taxpayer was the case in Shankar. Are they rebates from the vendor selling the product or service charged on the credit card, and thus simply a reduction of the purchase price? Are they compensation payments from the credit card company for using its credit card? It’s not a reduction of the interest charged by the credit card company because they are awarded even if the cardholder pays all balances and thus is not charged any interest. Is it a rebate to the merchant for using the credit card company’s system which the merchant chooses to share with the customer by having the credit card company make the payment on its behalf? Is it simply a rebate of the purchase price along the lines of the auto manufacture rebates to customers of automobile dealers, which the IRS concluded were not gross income and reduced the purchase price of the vehicle? The IRS did not grace us with its reasoning for its conclusion with respect to the manufacturer rebate. Why is a payment from a third-party to a buyer of something a reduction in the purchase price? There needs to be some sort of underlying rationale – constructive this or that, agency, something – to limit the scope of the conclusion. The incentive to the manufacturer and the relationship between the manufacturer and dealer are fairly easy to see. The relationship between the credit card company and the merchant isn’t quite so clear. Some sort of rationale is needed to explain how far the Revenue Ruling conclusion can be taken.
This case supports three observations about tax law. First, contrary to the misguided beliefs of many, tax law does not always involve numbers and in fact often does not. Second, there do not exist answers to every tax question. Third, tax law and tax analysis is convoluted because the business world has become convoluted. In The Frequent Flyer Flap, I shared this thought:
The author of the follow-up article [in 2012, describing reaction to Citibank’s issuance of Forms 1099] notes that “this whole thing is a perfect illustration of why our tax system is so messed up.” Perhaps the tax system is so messed up because business transactions are so messed up. Once upon a time, a person paid a price for an item and that was it. Then the marketing gurus jumped in with all sorts of gimmicks, incentives, cross-arrangements and other “deals” that appear to be price breaks but in the long run cost the consumer. When Citibank buys frequent flyer miles, it incurs a cost, and to maintain profits, it must reduce the interest it pays on its accounts. . . . So if people want a simple tax system, simplify the unnecessarily complicated business arrangements.Don't hold your breath.
Friday, August 29, 2014
The taxpayer purchased a home in 1998 in Wichita, Kansas, and used it as her principal residence until 2004, when she sold it because she became unemployed. She put her furniture into storage and moved into a mobile home owned by, and on the property of, her daughter. In 2005, the taxpayer started a new job in Palmdale, California, while continuing to live with her daughter, traveling not only between Wichita and Palmdale, but also between Wichita and employer sites in Texas and Georgia. When in Kansas she continued to live in the mobile home on her daughter’s property.
In 2007, the taxpayer purchased a fifth-wheel trailer, which she placed in an RV park in Palmdale. The trailer was hooked up to utilities in the park, but every six months, in accordance with park rules, the taxpayer moved the trailer to a different site within the park. The taxpayer had a car in Palmdale, registered it and the trailer in California, had a post office box near the park, filed California income tax returns using her California address, and had third-party information returns mailed to that address.
In March 2009, the taxpayer entered into a contract to build a house in Wichita. She moved into the house in November 2009, and began to use it as her residence.
The Court explained that the first-time homebuyer credit is available to a first-time homebuyer, which is an individual who had no present interest in a principal residence during the three-year period ending on the date of the principal residence in question. For constructed property, the purchase date is the day that the individual first occupies the residence. In this case, that took place in November of 2009. Thus, the question was whether the taxpayer had a present interest in a principal residence during the three years ending in November of 2009.
The IRS argued that the taxpayer owned a present interest in a principal residence during the three years ending on the day she moved into the residence constructed in Kansas, because she owned the trailer in which she lived in California. The taxpayer argued that although she owned the trailer, it was not her principal residence because her principal residence was on her daughter’s property in Wichita.
The Court sidestepped the dispute between the IRS and the taxpayer by first focusing on whether the trailer could be a principal residence. Because section 36 incorporates the definition of principal residence in section 121, the court applied the definition in the regulations under section 121. Those regulations provide that property used as a residence does not include personal property that is not a fixture under local law. Under California law, personal property is all property that is not real property, and real property is land, property affixed to land, property incidental or appurtenant to land, and property that is immovable by law. California law provides that something is affixed to land when it is attached to it by roots, imbedded in it, or permanently attached to something that is permanent. The Court explained that whether the trailer was affixed to the land depends on the facts and circumstances. The Court concluded that the trailer was not affixed to the land, despite being hooked up to utilities, because it did not sit on a foundation, it was supported by its wheels, it was required to be moved every six months, and it was moved every six months. Accordingly, the trailer could not be a principal residence, which meant that the taxpayer did not own a present interest in a principal residence during the three years ending in November of 2009. And with that conclusion, the other issues did not need to be addressed.
Had the taxpayer sold the trailer at a gain, the taxpayer would have had reason to try to persuade a court that she had sold a principal residence and was eligible for section 121 gain exclusion. Of course, she would not have prevailed. Yet in this situation, the fact that the trailer was not a principal residence was a good thing for the taxpayer. As I tell my students, sound bite generalizations and 140-character tweets oversimplify things. Though it might appear that characterizing a residence as a principal residence is an overriding tax planning goal, there are times when it is better not to make or win that argument.
Wednesday, August 27, 2014
Now the tide has turned. This time, it’s a matter of local jurisdictions trying to impose property tax on privately-owned bridges in the same area of Virginia. According to this article, the city of Portsmouth wants the owners of the South Norfolk Jordan Bridge to pay property taxes.
The bridge owners argue that the bridge is exempt from taxation because state law exempts from taxation any bridges and tunnels in Chesapeake Bay, its tributaries, or the Atlantic Ocean. They point to an amendment to recent budget legislation that declares, as a matter of restating existing law, that any bridge constructed and operated under specific statutory provisions “shall not be deemed to be within any locality to which it is attached,” without naming the Jordan Bridge.
The city argues that the legislation does not address taxation but simply deals with boundaries, as the amendment does not affect the state’s tax code but only its boundary-setting statutes. The city points out that the owners of the bridge rely on public services that are provided by the city, such as emergency response to accidents.
The dispute may end up in court. Or perhaps the legislature will address the situation. The author of the amendment in question claims that he and others in the state capital did not know the issue existed, and would have discussed the matter with legislators from the city had they known.
The deadlock demonstrates another reason why public services ought not be put into the hands of money-seeking private enterprises. Taking a position that public services ought to be made available to a private enterprise that doesn’t pay for those services is emblematic of the problems presented by post-modern capitalism. It would not be surprising to discover that the owners of private structures have paid lobbyists to “persuade” state legislators to exempt them from paying their fair share of the cost of the services that they use.
Perhaps the city should announce that it will accept the bridge owners’ argument that the bridge is not within the boundaries of the city, and that, accordingly, the city will continue to provide public services to those people and structures within its boundaries. What will happen when people realize that if they use the bridge and have an emergency, no help will be forthcoming? Perhaps they will stop using the bridge, which in turn would cut down bridge revenue. Post-modern capitalists need to understand that one needs to spend money to make money, and the idea of getting free public services is akin to trying to run a business on unwaged labor.
Monday, August 25, 2014
According to the story, the city of Philadelphia, which lost its appeal of the Tax Review Board’s adverse decision, has let the deadline for appealing the judge’s decision pass by without taking any action. A representative of the mayor confirmed that no appeal would be taken, but added no additional information. It has been suggested that the city may attempt to raise the revenue by amending the amusement tax statute to make it cover the dancers. If legislation of this sort is introduced, rest assured that it will be debated and the lobbyists will be busy. The lawyer for the entertainment venues in question suggested that there are First Amendment issues, and also pointed out that this sort of legislation could reach other activities, such as karaoke singing.
Though the entertainment venues prevailed in this dispute, even if no legislative action develops, they incurred what their lawyer called “a small fortune” in resisting the city’s taxation attempt. Hopefully their tax advisors remember that there could be a deduction to offset part of the cost.
Somehow, I don’t think we’ve heard or read the last of this. Sequels are produced because someone thinks there’s money to be made. It only takes one member of City Council to propose legislation.